Government and IT- "A Recipe For Rip-Offs": Time For A New Approach - Public Administration Committee Contents

4 Suppliers

Large Systems Integrators

26. A recurring theme throughout our inquiry was
the dominance of Government IT by a small number of large systems
integrators (SIs).[46]
Professor Margetts, Oxford Internet Institute, said that "the
concentration of the market in the UK [...] with a small number
of suppliers getting the bulk of the contracts," was
one of the features that contributed to successive governments'
poor performance in IT.[47]
The NAO's landscape review stated that "at present 80%
of central government IT work is undertaken by 18 suppliers"
and that this contrasted with 2004 when just 11 companies had
undertaken 80% of this work.[48]
Some of these contracts are extremely large and extend over a
long period of time; the Aspire contract between HMRC and Capgemini
covers a 13 year period and was originally valued at £2.8
billion.[49] This contract
is a case study of what is wrong with the present procurement
culture. Such a large contract is too complex to manage. The assessment
of costs and benefits is opaque and it commits too much power
and money to a single supplier.

27. There was widespread agreement among commentators,
academics, the Government and the NAO that too much business went
to too few companies, although we could not find a figure on which
all groups would agree.[50]
The Government ICT strategy described the current situation as
an "oligopoly",[51]
a sentiment echoed by the Public Accounts Committee.[52]

28. Some SMEs that contributed to our inquiry went
further. Martin Rice, CEO of Erudine, an IT SME, described the
situation as a "cartel".[53]
Many of the SMEs who participated in our private seminar echoed
this view, although they were unwilling to put these concerns
on the record for fear of losing business. Some alleged that large
suppliers intentionally vary the effort they put into their bids
for government contracts based on whether they or their competitors
have been successful in previous competitions. This suggestion
was also made during public evidence sessions:

Chair: And does that mean they actually
decide, "You go for that contract and we'll go for this one"?

Martin Rice: I don't know if it is as
much as that but I know that if they win one, they will bid for
other ones knowing that they will lose some and they will not
put as much effort into the bid.[54]

29. These accusations were strongly contested by
representatives of large IT companies. Craig Wilson, Hewlett Packard,
argued that:

Last year [...] there were over 700 contract
award notices through public procurement in the UK. This is public
procurement for these kinds of projects. Those awards were made
to some 460 different companies, so that does not sound to me
like a cartel.[55]

We were very concerned about the suggestion that
the technology industry may operate a cartel with no supporting
evidence or information being offered to the committee. Such a
suggestion is not only inaccurate and misleading, but also potentially
damaging to an industry that is a vital part of the UK economy.[56]

Nevertheless the same memorandum went on to say that
the:

government's current go-to-market approach presents
significant barriers to new entrants to the market, especially
in terms of the change-averse culture in government and the preference
given to suppliers with UK government experience.[57]

30. Extremely serious allegations have been made
about the behaviour of some large suppliers. There are clearly
very strong feelings on both sides of this debate. We are not
in a position to come to a firm verdict on this matter. Having
described the situation as an "oligopoly" it is clear
the Government is not happy with the current arrangements. Whether
or not this constitutes a cartel in legal terms, it has led to
the perverse situation in which the governments have wasted an
obscene amount of public money. The Government should urgently
commission an independent, external investigation to determine
whether there is substance to these serious allegations of anti-competitive
behaviour and collusion. The Government should also provide a
trusted and independent escalation route to enable SMEs confidentially
to raise allegations of malpractice.

SUPPLIER LOCK-IN: LEGACY SYSTEMS
AND INTELLECTUAL PROPERTY RIGHTS

31. Government has a large number of older, legacy
IT systems. The IfG Report noted that a large proportion of IT
expenditure was devoted to maintaining and updating legacy systems
and that "developing interoperability between legacy systems
and new services and applications is a complex and costly undertaking."[58]
This reliance on legacy systems represents a serious risk to government
and can act as a barrier to expanding its supplier base. Only
a limited number of companies have the expertise and the intellectual
property rights to operate these systems so the government is
locked in to dealing with this small group of companies.

32. We received suggestions from some SMEs that the
major SIs used legacy systems as leverage to maintain their dominance.
Some SMEs reported that there were solutions that could easily
transfer data from old platforms, but that a combination of risk
aversion and vested interests prevented these solutions being
adopted.

33. Another area of lock-in to the current large
suppliers arises as a consequence of SIs taking ownership of the
intellectual property (IP) of the information systems they supply.
As a result the government may not have rights over systems it
has paid for. This can make it costly for government to migrate
to newer and more cost-effective systems or suppliers.

34. We recommend that the Government develop a
strategy to either replace legacy systems with newer, less costly
systems, or open up the intellectual property rights to competitors.
Alternative means of dealing with legacy systems should be explored
with the widest possible range of suppliers, including SMEs.

Widening the supplier base and
the role of SMEs

35. The Government's analysis has shown that its
large IT contractors are not performing well. A Cabinet Office
review in September 2010 of the performance of the 14 largest
IT suppliers found that none of them were performing to a "good"
or "excellent" level, with average performance
being a middling "satisfactory with some strengths".
Some were performing significantly worse.[59]

36. At the Conservative Spring Conference in March
2011 the Prime Minister said that he wanted to "throw
open the bidding process to every single business in our country"
to provide "a massive boost for our small businesses".[60]
The Government has announced a number of initiatives aimed at
increasing the number of IT SMEs that undertake government work:
including increasing the use of SMEs as subcontractors, increasing
the number of SMEs that contract directly with government; reducing
the size of contracts; and simplifying the procurement process.

37. However, despite these intentions, we received
numerous reports from SMEs about poor treatment by both Government
departments and large companies who sub-contract government work
to SMEs. There is a strong suspicion that the Government will
be diverted from its stated policy and that its objective will
not be achieved.

SMES AS SUBCONTRACTORS

38. The NAO considered the issue of SMEs being involved
in the delivery of Government IT by subcontracting with large
SIs and concluded that "it remain[ed] to be seen whether
this approach will deliver the expected benefits of reduced costs
and greater diversity and innovation in the supply chain."[61]
An article in Computer Weekly has criticised the use of subcontracting
to improve SME involvement, arguing that when large companies
were "given the power to hire and fire SMEs vying for
government business or to cut everyone else out and do the work
themselves" they inevitably chose the latter.[62]
The Minister also pointed out that subcontracting could lead to
the Government paying a high price as it had to cover the margin
of both the sub and prime contractor.[63]

39. SMEs approached us informally to express concerns
based on their own experiences of subcontracting. We heard of
cases where SIs had involved SMEs in the bidding process so they
could demonstrate innovation, only for the SME to be dropped after
award of contract. In some of these cases SMEs felt that they
have provided innovative ideas which had then been exploited by
the larger SIs. We were also told by SMEs that by subcontracting
with an SI they were barred from approaching government directly
with ideas that might allow it to radically transform its services
and reduce costs. This was because SIs did not want the Government
to be provided with ideas that could result in them losing business,
or having to reduce costs.

40. When we put these concerns to the Government
we were told that their contracting arrangements did not stop
subcontractors speaking directly to Departments.

Commercially, when we say "go through"
it does not mean there is a wall between us and them [...] there
are many suppliers who have innovations and ideas they want to
share with us, and they can directly do that to us.[64]

However, during our private seminar with SMEs, we
were told that this did not reflect their experiences. SMEs reported
that they were instructed to approach the SI first in order to
obtain permission to talk to a Department and that some Departments
refused to deal with them directly.

41. The Government has established the Innovation
Launch Pad programme which is intended to address this concern.
This scheme should enable SMEs to pitch their business proposals
for products and services they can provide to drive better value
for money.[65] We welcome
the scheme, but as a one-off exercise it does not address the
fundamental concern that SMEs have no permanent route which enables
them to bring innovative ideas directly to Government.

42. We take seriously the concerns expressed by
many SMEs that by speaking openly to the Government about innovative
ideas they risk losing future business particularly if they are
already in a sub-contracting relationship with an SI. The Government
should reiterate its willingness to speak to SMEs directly, and
commit to meeting SMEs in private where this is requested. We
recommend that the Government establish a permanent mechanism
that enables SMEs to bring innovative ideas directly to government
in confidence, thereby minimising the risk of losing business
with prime contractors.

43. When SMEs subcontract with a large SI they
do not always enjoy the same payment terms that the SI has secured
with the Government. Craig Wilson, Hewlett Packard, explained
that the reason for this was that "the procurement process
is decoupled from the contract piece."[66]
He noted that the Government had been very active in pressing
companies to pass on favourable payment terms to SMEs and remarked
that large companies "should not be taking advantage of
the leadership" which the Government was showing in this
area.[67] Mr Wilson
committed to taking up this issue and seeing if improvements could
be made.[68]

44. Where SMEs do subcontract with a large SI,
the SI should ensure that it pays the SMEs on the same terms on
which the Government pays the large SI. We welcome the Government's
own efforts to improve the speed with which it pays its contractors,
and we encourage it to ensure its prime contractors pass these
benefits on to SMEs.

REDUCING CONTRACT SIZE

45. To increase the number of SMEs who secure business,
the Government is reducing the size of its contracts. The intention
is to create more opportunities of an appropriate size for SMEs
to bid for. The Minister told us there was a presumption that
no projects should have a lifetime value of more than £100
million,[69] although
this is still large by international standards.[70]
Reducing contract size has other positive benefits for the Government
such as reducing procurement timescales, as contracts of a lower
value are subject to simpler procurement procedures. It could
simplify the process of benchmarking the quality, performance
and pricing of existing contracts, by breaking information down
into smaller units that are easier to analyse.

46. We welcome plans for IT contracts to be broken
up to allow for more effective competition and to increase opportunities
for SMEs to win Government work. We urge the Government to create
more contracting opportunities worth much less than £100
million.

AGGREGATED DEMAND VERSUS AGGREGATED
SUPPLY

47. Following the Green Review the Government has
been moving to act as a single buyer to obtain economies of scale.
Using its collective purchasing power has considerable merit for
government when purchasing commodity products or services (such
as desktop computers). Doing this will also support efforts to
commoditise government IT procurement, which was a central recommendation
of the IfG's IT Report.[71]

48. This approach can be counter-productive. The
effect of demand aggregation can be to aggregate supply, further
concentrating contracts in the hands of a few large SIs. Departments
are following instructions from the Cabinet Office Efficiency
and Reform Group (ERG) to switch away from their existing direct
SME contracting arrangements in favour of centralised procurement
models. This would mean that SMEs would become tier 2 suppliers
behind selected large suppliers, preventing SMEs from contracting
directly with departments. The Cabinet Office has confirmed that:

Spend is being channelled into three current
channels: a) existing framework contracts where spot buying is
undertaken centrally (this is known as Home Office Cix), b) department-specific
arrangements based on their unique needs (such as FCO's arrangements
with Hays) and c) an existing contract with Capita, owned and
managed by DWP and available to all government departments.[72]

49. It is unclear to us how narrowing the supply
channels will create a more open and competitive market. The nature
of this supply-side aggregation of SMEs under large contracts
appears to be in direct contradiction of the policy articulated
by the Minister when he indicated his desire to encourage Departments
to secure more direct contracting with SMEs.[73]

50. We welcome the efforts the Government is making
to reduce the cost it pays for IT. However the Government's plan
to act as a single buyer appears to be leading to a consolidation
towards a few large suppliers. This could act against its intention
to reduce the size of contracts and increase the number of SMEs
that it contracts with directly. We are particularly concerned
with plans to move SME suppliers to an "arm's length"
relationship with Government. The Government needs to explain
how it will reconcile its intentions to act as a single buyer,
secure value for money and reduce contract size to create more
opportunities for SMEs.

PROCUREMENT

51. SMEs also suffer as a result of the complexity
and cost imposed by the public procurement regime. Janet Grossman,
Chair of Intellect Public Sector Council described the challenges
the system poses, especially for smaller companies:

as a small and medium player with innovation,
the cost of entering a procurement cycle can be life threatening
[...] if you are a small innovator and you want to do something
radical or even a bit different, it can be very hard for you.[74]

David Clarke, Chair of BCS,[75]
described the procurement process as the "root cause"
of many of the problems facing Government IT, arguing that if
this issue was not resolved "nothing else will be fixed".[76]

52. Government procurement for public works, goods
and services is subject to EU regulation to enable the operation
of a single market. The procurement procedure used varies depending
on the value of the contract; the higher the value of the contract
the more rigorous the process which must be observed.[77]
There are a number of different procurement procedures which the
contracting authority can use (open, restricted, competitive dialogue
and negotiated). The choice of procedure determines both the number
of stages the process will involve as well as the minimum length
of those stages.

53. Procurements that go through the most rigorous
process take an average of 77 weeks to complete in the UK. This
length means that many small businesses cannot commit staff to
work on a bid for the duration of the procurement process.
The length of the process also makes it difficult
for Government information systems to keep up-to-date; as by the
time a procurement cycle has finished both the policy and available
technology may have changed. Janet Grossman argued that the cost
and effort involved in running a procurement process encouraged
departments to tender for large contracts to decrease the frequency
with which they have to bear these costs.[78]

54. While EU procurement law was often seen as a
barrier to effective procurement the IfG's System Error report
noted that the timescales imposed by the EU Directives account
for less than 10% of the average 77 week procurement period.[79]
Similarly, Olswang LLP, a firm specialising in business law, argued
that:

the regulatory regime is not as inflexible from
a commercial perspective as is commonly made out by the press
and others. More often than not, restrictions arise because those
who interpret the rules in central government either adopt an
overly restrictive approach - for fear of European Commission
infringement proceedings against the UK - or simply do not provide
guidance on an issue and thus leave small, less expert, individual
public authorities to find their own way through the Regulations.[80]

55. However there is always a risk of infraction
proceedings if any potential contractor can prove that it has
been materially disadvantaged by having been treated differently
from the winner. This makes it difficult for the Government to
have too many bidders. We also heard evidence to suggest that
the current procurement regime mitigates against "agile development."[81]

56. The Minister provided us with a similar analysis,
arguing that the problem was not caused by the way the EU directives
have been implemented, saying that he was "reasonably
confident [...] that we have not gold-plated the European Directives
in our own law."[82]
Instead he believed the problem lay with the amount of guidance
issued:

What we have done in terms of the guidance that
goes out is massively embellished this. There are 6,000 pages
of guidance that went out from the Office of Government Commerce
on big IT procurements.[83]

He also stated that he was pressing for deregulation
of the contracting process and a change to the European Directive.[84]
The Government has already taken steps to simplify procurement
and has issued two procurement notes which have implemented some
reforms.[85]

57. The way procurement currently operates favours
large companies that can afford to commit the staff and resources
to navigate the convoluted processes. It also encourages the Government
to confine discussions to as few potential contractors as possible.
If the Government is serious about increasing the amount of work
it awards to SMEs it must simplify the existing processes.
We welcome the Minister's assurance that the Government is
simultaneously seeking to change the current European Directive
regarding procurement and taking steps to simplify official guidance
that surrounds the procurement process. We ask the Government
to update us on the progress it is making on both initiatives
in its response to this Report.

OTHER SME UNFRIENDLY PRACTICES

58. We also heard that the Government's standard
contracts discriminate against SMEs, since they include complex
obligations regarding unlimited liability, limiting the percentage
of business that a government contract would represent in terms
of annual turnover, and length of trading history. It was suggested
that standard government contracts should be designed for SMEs
by default, with SIs left to negotiate exceptional arrangements
for more complex work.[86]

59. Another bureaucratic burden is that similar
questions are often asked during the pre-qualification stage of
procurement exercises: requiring companies to provide three years'
worth of accounts, and detail how much of a company's business
the contract would represent. Whilst the intention is to prove
a company is financially viable and to ensure that the company
is not overly dependent on any other single contract, it can also
have the effect of eliminating SMEs from a competition. The Government
has already committed to removing pre-qualifying questionnaires
from the majority of its tenders.[87]

60. We recommend that the Government investigate
the practices which seem unintentionally to disadvantage SMEs.
When contracts and pre-qualifying questions are drawn up thought
must be given to what impact they could have on the eligibility
and ability of SMEs to apply for work, and whether separate provision
should be made for SMEs. We believe it would be preferable if
the default procurement and contractual approach were designed
for SMEs, with more detailed and bespoke negotiation being required
only for more complex and large scale procurements.

CONSEQUENCE OF GREATER USE OF SMES

61. Increasing the use of SMEs will place extra pressure
on departments. The management of smaller organisations is currently
outsourced to the large SIs. For example the Aspire framework
provides HMRC with access to over 200 IT suppliers.[88]
Mr Pavitt, HMRC, Chief Information Officer (CIO) said that "managing
those individually would be quite a heavy bandwidth for a Government
department".[89]

62. It is not clear that Departments are willing
to take on the additional work that contracting directly with
SMEs implies even where this could yield significant savings.
Erudine, an IT SME, told us that its mechanism for migrating a
legacy system onto a more modern, cheaper platform, which could
generate potential savings of around £4m a year was rejected
by a senior DWP IT official who gave the following explanation:

we have as you know an 'interest' in having SMEs
present and working in the department for good political reasons.
So you have other value to us [ is] purely political. You
guys need to be realistic. I will be very candid with you [...]
it is a huge amount of bother to deal with smaller organisations.
Huge. And we wouldn't necessarily do that because it doesn't make
our lives simpler.[90]

63. The DWP said that it did not comment on anonymous
and unattributable comments but that the views expressed did not
represent those of the Department and that the Department supported
the use of SMEs in the delivery of its IT. It reported that in
2009/10 SMEs made up 29.3% of their supplier base, either as
a prime contractor or a subcontractor to another supplier.
We welcome this assurance from the Department but this account
does suggest that attitudes at official level risk undermining
ministers' ambitions to increase the number of SMEs Government
contracts with directly.

64. The Government presumption in favour of smaller,
disaggregated contracts should lead to more direct contracting
with SMEs. This will require Departments to invest more effort
in managing relationships directly with SMEs meaning that more
systems integration work is performed in-house, but this will
yield longer term benefits through increased innovation and lower
costs. Ministers need to ensure their officials have the skills,
capacity and above all the willingness to deliver on ministerial
commitments to SMEs.